We continue to believe that U.S. recession fears are overblown; April core PCE Friday will be the U.S. data highlight; FOMC minutes will be released Wednesday; April Chicago Fed National Activity Index will be reported Monday; regional Fed manufacturing surveys will continue to roll out; the only major Canada data this week is March retail sales Thursday

The eurozone reports mostly survey data this week; ECB tightening expectations remain subdued; U.K. data highlight will be preliminary May PMI readings Tuesday; BOE tightening expectations remain stalled.

Japan reports some key data; Australia also reports key data; opposition Labor’s win over the weekend has negative implications for the bond market; RBNZ meets Wednesday and is expected to hike rates 50 bp to 2.0%

AMERICAS

We continue to believe that U.S. recession fears are overblown.  U.S. yields have fallen sharply from the early May peaks as some soft data have raised concerns about the economic outlook.  Our two favorite indicators – the 3-month to 10- year yield curve and the Chicago Fed National Activity – suggest otherwise.  While the slop of the curve has fallen from the 231 bp peak in early May, it remains far from inversion.  Likewise, the Chicago Fed NAI (see below) also remains far from recessionary readings.  We believe that U.S. yields will resume rising as risk off impulses ebb and that should help the dollar in the coming days. 

April core PCE Friday will be the U.S. data highlight.  It is expected to ease to 4.9% y/y vs. 5.2% in March.  if so, it would be the second straight month of deceleration but still well above the 2% target.  While this would be a welcome relief, the Fed has made it clear that it will continue with its aggressive tightening over the next several meetings.  Personal income and spending will also be reported at the same time and are expected to rise 0.5% m/m and 0.7% m/m, respectively.   

FOMC minutes will be released Wednesday.  At the May 3-4 meeting, the Fed hiked rates the expected 50 bp to 1.0% and laid out plans for aggressive Quantitative Tightening to begin in June.  Since then, Fed officials have been uniformly hawkish.  As a result, we expect the minutes to come in quite hawkish.  There will be some Fed speakers this week as well.  Bostic and George speak Monday.  Powell speaks Tuesday.  Brainard speaks Wednesday.  Again, all are expected to maintain the hawkish tone that has been in place since the FOMC meeting. 

April Chicago Fed National Activity Index will be reported Monday.  Because it is a good predictor of economic downturns, this series should command more and more attention as the Fed tightens.  Consensus see 0.50 vs. 0.44 in March.  If so, the 3-month average would fall slightly to 0.49 vs. 0.58 in March.  That March 3-month average was the highest since May 2021 and we note that a modest decline to 0.49 would still be the second highest since May 2021 and well above the -0.7 reading that typically signals a recession.   

We get our first revision to Q1 GDP Thursday.  While this is old news, it is expected at -1.3% SAAR vs. -1.4% previously. We see risks of a larger upward revision in light of the large upward revision to March retail sales data, as the so-called control group used for GDP calculations was revised to 1.1% m/m vs. -0.1% previously.  Markets are already looking ahead to Q2 and the Atlanta Fed’s GDPNow model is currently tracking 2.4% SAAR growth.  The next update to the model comes this Wednesday.  

Regional Fed manufacturing surveys will continue to roll out.  Richmond reports Tuesday and is expected at 10 vs. 14 in April.  Kansas City reports Thursday and is expected at 18 vs. 25 in April.  Last week, Empire came in at -11.6 vs. 24.6 in April and Philly Fed came in at 2.6 vs. 17.6 in April.  Preliminary May S&P Global (formerly Markit) PMI readings will also be reported Tuesday. Manufacturing is expected at 57.8 vs. 59.2 in April, services is expected at 55.3 vs. 55.6 in April, and the composite is expected at 55.5 vs. 56.0 in April. 

Other minor data round out the week.  April new home sales will be reported Tuesday and are expected at -1.7% m/m vs. -8.6% in March.  Durable goods orders will be reported Wednesday and are expected at 0.6% m/m vs. 1.1% in March.  Weekly jobless claims and April pending home sales (-2.0% m/m expected)  will be reported Thursday.  Continuing claims will be of interest as they are for the BLS survey week containing the 12th of the month and are expected at 1.31 mln vs 1.317 mln the previous week.  April advance goods trade (-$114.7 bln expected), wholesale and retail inventories, and final May University of Michigan consumer sentiment will be reported Friday.

The only major Canada data this week is March retail sales Thursday.  Headline is expected at 1.4% m/m vs. 0.1% in February, while ex-auto is expected at 1.9% m/m vs. 2.1% in February.  The economy is humming along even as inflation continues to accelerate.  WIRP suggests a 50 bp hike June 1 is fully priced in.  Looking ahead, the swaps market is now pricing in 200 bp of tightening  over the next 12 months that would see the policy rate peaking near 3.0%, down from 3.25% at the start of last week.  

EUROPE/MIDDLE EAST/AFRICA

The eurozone reports mostly survey data this week.  Preliminary May PMI readings will be the highlight Tuesday.  Headline manufacturing is expected at 54.8 vs. 55.5 in April, services is expected at 57.5 vs. 57.7 in April, and the composite is expected at 55.0 vs. 55.8 in April.  Looking at the country breakdown, the German composite is expected at 53.8 vs. 54.3 in April and the French composite is expected at 57.0 vs. 57.6 in April.  Italy and Spain will be reported with the final May readings next week.   

Individual countries will also report mainly sentiment indicators.  May German IFO business climate will be reported Monday.  Headline is expected at 91.4 vs. 91.8 in April, with current assessment expected at 96.8 vs. 97.2 in April and expectations expected at 86.5 vs. 86.7 in April.  May French business confidence will be reported Tuesday and is expected at 105 vs. 106 in April.  June German GfK consumer confidence will be reported Wednesday and is expected at -25.5 vs. -26.5 in May.  May Italian consumer and manufacturing confidence will be reported Thursday, with both expected to drop from April to 99.9 and 109.0, respectively.  Spain reports April retail sales data Friday and is expected at -2.0% y/y vs. -4.2% in March.   

ECB tightening expectations remain subdued.   Liftoff July 21 remains fully priced in.  However, the swaps market is now pricing in only 150 bp of tightening over the next 12 months followed by another 25-50 bp of tightening priced in over the following 12 months that would see the deposit rate peak between 1.25-1.50% vs. 1.75% at the start of the month.  April M3 data will be reported Friday and growth is expected to remain steady at 6.3% y/y.  If so, it would remain at the low for the cycle just as the ECB is preparing to end QE in June and hike rates in July.  There is a full slate of ECB speakers this week.  De Cos, Holzmann, Nagel, and Villeroy all speak Monday.  Villeroy speaks again Tuesday.  Rehn, Panetta, Holzmann, Lagarde, de Cos, and Lane all speak Wednesday.  ECB also publishes its Financial Stability Review Wednesday.  Lane speaks Friday.

U.K. data highlight will be preliminary May PMI readings Tuesday.  Manufacturing is expected at 55.0 vs. 55.8 in April, services is expected at 57.0 vs. 58.9 in April, and the composite is expected at 56.5 vs. 58.2 in April.  CBI also reports its May distributive trades survey Tuesday.  Retailing reported sales is expected at -30 vs. -35 in April.  Last week, CBI reported its May industrial trends survey, with total orders at 26 vs. 14 in April and selling prices at 75 vs. 71 in April.  Lastly, the government also reports its April public sector net borrowing Tuesday.  Ex-banking groups is expected at GBP18.8 bln vs. GBP18.1 bln in March. 

Bank of England tightening expectations remain stalled.  WIRP suggests another 25 bp hike is priced in for the next meeting June 16.  Looking ahead, the swaps market is pricing in 150 bp of total tightening over the next 12 months that would see the policy rate peak near 2.50%, steady from the start of last week. Bailey speaks Monday, followed by Tenreyro Tuesday.

ASIA

Japan reports some key data.  Preliminary May PMI readings and April department store sales will be reported Tuesday. May Tokyo CPI data will be reported Friday.  Headline is expected to pick up a tick to 2.5% y/y, while core (ex-fresh food) is expected to pick up a tick to 2.0% y/y and core ex-energy is expected to pick up a tick to 0.9% y/y.  Yet BOJ officials continue to look through this spike and are maintaining the current accommodative stance for the time being.  Governor Kuroda speaks Wednesday. 

Australia also reports some key data.  Preliminary May PMI readings will be reported Tuesday. April retail sales data will be reported Friday and are expected at 0.9% m/m vs. 1.6% in March.  Consumption should remain supported by full employment.  The economy remains robust even as price pressures continue to rise.  Another 25 bp hike June 7 is fully priced in, while the swaps market sees the policy rate peaking near rate peak near 3.25% over the next months, steady from the start of last week. 

Opposition Labor’s win over the weekend has negative implications for the bond market.  Ahead of the vote, Shadow Treasurer Chalmers promised greater spending if Labor returns to power.  This means greater bond supply ahead.  In addition, the economy is already at full employment and facing high inflation, which suggests demand for additional bond issuance would likely require even higher yields to attract investors.   

Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 50 bp to 2.0%.  At the last meeting April 13, the bank hiked 50 bp and said “The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations.  It is appropriate to continue to tighten monetary conditions at pace.”  The bank said then it was comfortable with its expected rate path from the February meeting, which sees the policy rate at 2.5% by early 2023 before peaking near 3.5% in 2024.  Updated macro forecasts and new expected rate path will be revealed this week.  The swaps market sees 200 bp of further tightening over the next 12 months and another 25 bp over the following 12 months that would see the policy rate peak near 3.75%.